Monday, February 27, 2017

Ten years ago
today, we witnessed that largest one-day VIX spike
in the nearly three decade history of the VIX.
On that day, the VIX rallied from a prior close of 11.15 to 18.31 – a 64.2%
gain. The move came in conjunction with
a 3.5% decline in the SPX (large, but nothing like what would follow during the
next two years) and followed overnight concerns related to the Chinese
government raising interest rates to discourage speculation. The fears in China were largely
responsible for a 8.8% loss in the Shanghai Composite Index and a 9.9% loss in
the FTSE/Xinhua China 25 index that is the basis for the popular Chinese ETF, FXI.

In retrospect,
the biggest VIX spike of all was a short-lived phenomenon whose fundamental and
technical underpinnings turned out to pose no lasting threats. As is often the case, traders who faded this
move (and keep in mind there were no VIX ETPs
available at that time) and bet on mean
reversion cleaned up on that trade.

So, did this
move in 2007 provide a hint as to what would follow in 2008? As I see it, the timing was merely a
coincidence.

It may not be a
coincidence, however, that the biggest VIX spike in history helped to usher in
the golden era of VIX spikes, with 15 of the top 22 one-day VIX spikes of all
time having occurred during the past decade, as is reflected in the graphic
below. Of course, most of the spike in
VIX spike activity was the result of the Great Recession and some of the “disaster
imprinting” that followed such a severe shock to many investor psyches.

[source(s): VIX and More]

Some may look
around at a VIX that is not too much different now than it was a decade ago and
wonder what it might take to trigger another 64% jump in the VIX. Certainly there is a huge policy uncertainty
overhang at the moment, lots of political (and related economic) uncertainty in
Europe and there are always some black swans lurking just out of our
sightlines.

For now,
however, will just have to live with that eerie, unsettling feeling that often
accompanies low volatility and wait for another bump
in the night before we reassess the volatility landscape.

Ten years ago
today, we witnessed that largest one-day VIX spike
in the nearly three decade history of the VIX.
On that day, the VIX rallied from a prior close of 11.15 to 18.31 – a 64.2%
gain. The move came in conjunction with
a 3.5% decline in the SPX (large, but nothing like what would follow during the
next two years) and followed overnight concerns related to the Chinese
government raising interest rates to discourage speculation. The fears in China were largely
responsible for a 8.8% loss in the Shanghai Composite Index and a 9.9% loss in
the FTSE/Xinhua China 25 index that is the basis for the popular Chinese ETF, FXI.

In retrospect,
the biggest VIX spike of all was a short-lived phenomenon whose fundamental and
technical underpinnings turned out to pose no lasting threats. As is often the case, traders who faded this
move (and keep in mind there were no VIX ETPs
available at that time) and bet on mean
reversion cleaned up on that trade.

So, did this
move in 2007 provide a hint as to what would follow in 2008? As I see it, the timing was merely a
coincidence.

It may not be a
coincidence, however, that the biggest VIX spike in history helped to usher in
the golden era of VIX spikes, with 15 of the top 22 one-day VIX spikes of all
time having occurred during the past decade, as is reflected in the graphic
below. Of course, most of the spike in
VIX spike activity was the result of the Great Recession and some of the “disaster
imprinting” that followed such a severe shock to many investor psyches.

[source(s): VIX and More]

Some may look
around at a VIX that is not too much different now than it was a decade ago and
wonder what it might take to trigger another 64% jump in the VIX. Certainly there is a huge policy uncertainty
overhang at the moment, lots of political (and related economic) uncertainty in
Europe and there are always some black swans lurking just out of our
sightlines.

For now,
however, will just have to live with that eerie, unsettling feeling that often
accompanies low volatility and wait for another bump
in the night before we reassess the volatility landscape.

Purpose of this Blog

The intent of this blog is to educate, inform and entertain readers, while also serving as an archived learning laboratory of sorts as I try to sharpen my thinking in areas such as volatility, market sentiment, and technical analysis. I also enjoy charging off on tangents and hope that readers may find some illumination or at least amusement in these forays.

Reviews of VIX and More

About Me

Chief Investment Officer at Luby Asset Management LLC in Tiburon, California. Previously worked as a full-time trader/investor and also a business strategy consultant. Education includes a BA from Stanford and an MBA from Carnegie Mellon.
Useless trivia: I once broke the world pogo stick jumping record without knowing it.